Tyco: Breaking Up and Taking Off

Jan. 7.07 | About: Tyco International (TYC)

Excerpt from our One Page Barron's Summary (receive it weekly by email by signing up here):

Cleaning Up on Tyco's Breakup by Jonathan R. Laing

Highlighted companies: Tyco International Limited (NYSE:TYC)
Summary: Many were burned by Tyco International (TYC) when the stock collapsed after revelations its then-CEO and CFO had looted $170 million. New reasons for Wall St.’s pessimism include the stock’s flat-lining over the last year and the fact that the plan to split the unwieldy conglomerate into three units through spinoffs of its health-care business, electronics unit, and fire-and-security and engineered-products-and-services operations did not create much buzz. C. Steven Tusa of JPMorgan: "Perhaps the most favorable thing one can say about Tyco is that most everybody is pessimistic about the company." But T. Rowe Price Capital's (NASDAQ:TROW) Appreciation Fund has been quietly amassing Tyco shares, and according to T. Rowe's co-manager Jeff Arricale, when one considers the potential values of the three new companies, there is plenty of reason for optimism. He sees them trading at a combined $38-45/share:

  • Tyco 07 01 2007 ChartT. Rowe Price has high hopes for Tyco's soon-to-be liberated electronics business, which last year generated $12.7 billion in revenues and $1.8 billion in operating income. The electronics business figures to benefit in the years ahead from both the surge in the penetration of electronic devices in new cars and a strong global economy. TROW analyst Peter Bates thinks the unit is worth $12-14/share.
  • In Tyco's crown jewel, its health-care operation, revenue growth has slipped to just 2% in the fourth fiscal quarter and operating margins have dropped from 26%+ a few years ago to just 22.8% in Q3 2006. While many say these developments indicate that significant underinvestment in new products is starting to exact a toll, Bates argues that the situation is hardly irreparable for the unit, and doesn't see the need for increased R&D as proving too punishing. Strong Q4 revenues in Asia-Pacific (+14%) and Latin America (+13%) bode well for the unit's global sales. And its top-notch sales group allows it to quickly translate acquisitions of promising new technologies into sales gains. Bates has the health unit trading for $15-$17 a share.
  • Tyco's fire-and-security unit has about 200 plants worldwide that make pipes, valves and flow-control equipment for Tyco's fire-safety systems, and commercial/governmental users. Many of these will be shut down and consolidated to increase the unit's scale and lower fixed costs, boosting margins. Bates sees the unit trading for $11-$14 a share.
Barron's Bottom Line: "Shareholders may hit the trifecta: Shares could be worth 50% more than Tyco's current stock, thanks to higher price-earnings ratios."
Related: Tyco Q4 Profits Soar 38% to $1.27 Billion, Looking Beyond the Scandal at Tyco, Tyco 10-K: Kozlowski Delinquent In Restitution Payments